- The business outlook for banks, and retail banks in particular, has deteriorated significantly
- Negative interest rates for savers are becoming increasingly likely, whereas mortgages with negative interest rates are more wishful thinking
- Traditional business models are reaching their limits, and banks are recognizing that they need to tap into new sources of revenue
- Focusing on customers is considered key to success
- Clamping down on costs in the near term has to happen before a long-term reorientation can take place
- Sustainability has so far only played a bigger role in financial investing, not lending
- Bank customers are largely satisfied with their banks
The business outlook for banks, and retail banks in particular, has deteriorated significantly
“Low interest rates, low volatility and substantial uncertainty” is how Patrick Schwaller, Managing Partner, Audit Financial Services at EY Switzerland, describes the conditions in which Swiss banks are currently operating. This entails a large number of challenges. In the important interest margin business, banks are reliant on normal yield curves with significant differences between short- and long-term yields. Against the expectations of most banks in last year’s survey, however, the normalization of monetary policy has become a distant prospect, and banks face a continuation of negative interest rates and extraordinarily flat yield curves. “This is causing interest rate margins to tighten even more and is impacting banks’ business outlook,” explains Olaf Toepfer, Head of Banking & Capital Markets at EY Switzerland. In the commission business as well, banks are increasingly facing vanishing margins, as well as the impact of geopolitical uncertainty and growing economic concerns on the activities of investors and banking clients. In light of these developments, it is no surprise that about a third of banks expect their profits to fall in the short to medium term (prior year: 22% and 16%). “Sentiment among retail banks in particular has suffered a remarkable decline,” Toepfer adds.
Negative interest rates for savers are becoming increasingly likely, whereas mortgages with negative interest rates are more wishful thinking
The pressure on margins in the interest margin business means that banks are increasingly passing on negative interest rates to their customers. While in 2015, 70% of the banks surveyed categorically ruled out passing on negative interest rates, the figure is now only 21%. More than half of banks (55%) – a significant increase compared with the prior year (33%) – indicated that they would like to reduce the threshold for applying negative interest to customers’ balances. “Negative interest rates are already a reality for high-net-worth private customers. How much longer can banks protect small savers?”, Schwaller asks. This also raises the question of whether Swiss banks will offer negative-interest mortgages on a larger scale in the future. Banks largely agree in this regard: 83% of those surveyed consider the granting of mortgages with negative interest rates to be unrealistic.
Traditional business models are reaching their limits, and banks are recognizing that they need to tap into new sources of revenue
The continuation of expansive monetary policies by the central banks and the resulting low or negative interest rates mean that banks need to grant more and more loans in order to keep their net interest income stable. Although Swiss banks have proved themselves relatively resilient in the challenging conditions of recent years, they face fundamental questions relating to their traditional business models. This is particularly true for the cantonal and regional banks with their strong focus on domestic and interest margin business. The majority of banks also seem to have come to this realization. “A total of 83% of the banks surveyed believe that they will need to tap into new sources of revenue in the future in order to maintain their earnings power,” Schwaller states.
Focusing on customers is considered key to success
But how can they tap into new sources of revenue? Most of the banks (60%) agree that a stronger focus on customers is key. “Banks that are able to place their customers even more clearly at the center of what they do will count among the winners in the long term,” Toepfer remarks. Only a small portion (19%) believe that purely product-focused measures will suffice to generate additional or new revenue streams. This assessment suggests that banks will base their activities even more on customers’ needs and demands in the future, rather than on the range of products they offer.
Clamping down on costs in the near term has to happen before a long-term reorientation can take place
Although the banks recognize that they need to fundamentally overhaul their business models, the focus will once again be on cost-effectiveness in the near term. 39% of banks (prior year: 32%) see costs as a priority issue for the next 12 months. This is the highest figure for the last three years. The stronger focus on costs is also a factor in the debate surrounding future compensation in the banking sector. Almost three quarters (71%) of the banks surveyed indicated that the compensation paid in the financial sector will be lower in the future.
Sustainability has so far only played a bigger role in financial investing, not lending
Sustainable investment has become more of an issue for investors and customers in recent years. The banks largely agree that this issue is more than just hype, and that the sustainable investment trend will persist in the long term (81%). At least a slim majority of banks (55%) expect to be able to play a significant role in the fight against climate change. It is therefore not surprising that 70% of banks intend to increase the range of sustainable investments they offer in the future. Although these survey results show that banks have discovered the topic of sustainable investment for themselves, it seems that this insight has not yet been fully incorporated into their advisory and investment processes or their reporting. The topic of sustainability is a mandatory component of the reporting process for fewer than a third of banks (30%), and just 9% reported that they inform their customers about the sustainability (ESG scores) of their portfolios through regular reports.
“The issue of sustainability does not currently play an important role in loan financing by banks, however,” Schwaller remarks. Only a minority of 19% of the banks surveyed said that they take ESG factors into consideration when lending, and only 25% had any intention of taking these criteria into account in the future.
Bank customers are largely satisfied with their banks, but only two out of three believe that banks always act in their customers’ interests
The vast majority of bank customers (85%) are largely satisfied with their bank’s services. This is a very encouraging result for Swiss banks, and underscores the high quality of the service and advice they provide. However, the picture is less positive for the banks when it comes to the question of whether banks act in their customers’ interests. “Only two out of three bank customers believe that banks always act in their customers’ interests,” Toepfer explains. This means that a third of the customers surveyed expressed doubts regarding this very crucial issue for banks.
Information on the study
The EY Bank Barometer is based on a survey of 100 managers (executive board members) of various banks throughout Switzerland. The questions were also put to managers working for the two big banks within Switzerland; their views have been drawn on in the general evaluations but have not been included in the evaluations by type of bank. Of the banks surveyed, 38% are regional banks, 28% are private banks, and cantonal and foreign banks account for 17% each. 79% of the banks are based in the German-speaking part of Switzerland, 14% in Western Switzerland and 7% in Ticino. The survey was conducted in November 2019. The data are collected and analyzed by EY in Switzerland. Two thousand bank customers were surveyed in this year’s study. The survey was conducted jointly by EY and the Redesigning Financial Services (RFS) initiative.
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